The UK government is set to tighten regulations for ESG ratings agencies as early as January 2024 in an attempt to improve trust.
First reported by the FT, the measures, which could be implemented as early as January 2024, will look to address concerns about the lack of oversight in the sector which currently holds significant influence over trillions of pounds worth of sustainable investments.
In March, the Treasury began a consultation on the new rules, seeking to determine whether regulations for ESG ratings providers should be introduced and the potential scope of such a regulatory regime. However, ministers are still in the process of formally analysing the consultation responses.
ESG ratings are used to determine which stocks and bonds are included in investment funds marketed as sustainable. Investors seeking to invest in sustainable companies heavily rely on them to make informed and reliable decisions with their capital.
It is uncertain whether new legislation is required or if existing laws can be amended to effectively regulate the industry. While the possibility of establishing a new watchdog has not been entirely ruled out, expanding the remit of the Financial Conduct Authority (FCA) will likely be a more probable option.
In August 2022, the FCA outlined its plans to establish a new voluntary advisory committee focused on ESG issues. In July 2023, it announced a voluntary code which is scheduled to be published next month, and would mandate agencies to disclose the steps they take to avoid conflicts of interest and publish more information about their methodologies.
The UK’s decision to regulate the sector comes after the European Commission also proposed new rules for ESG rating providers in June. The Commission recommended measures to require ratings providers to disclose more methodological details, and to register formally with authorities.
“ESG ratings agencies that score companies on governance factors are completely unregulated, so it’s very difficult to compare ratings by different agencies. We have no clarity on how these ratings are reached, and there appears to be a conflict of interests,” said Mairead McGuinness, European commissioner for Financial Services at the time.
